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Value Investing Heresy

July 02, 2012 | About:
ShadowStock

ShadowStock

11 followers
Short-term trading based on price to value metrics. Something about that just doesn't sound right: "Value," "short term" and "trading" all in the same sentence.

Countless stocks we would never include on our life-time punch card (as described by Warren Buffet) can be helpful. But many of those ideas, if at the right price, have tremendous expected value based on an annualized return over a short term. No, I'm not market timing, so back off (ha). Hope this mention of Warren Buffett will help you forgive me:

I could improve your ultimate financial welfare by giving you a ticket with only twenty slots in it so that you had twenty punches - representing all the investments that you got to make in a lifetime. And once you'd punched through the card, you couldn't make any more investments at all. Under those rules, you'd really think carefully about what you did, and you'd be forced to load up on what you'd really thought about. So you'd do so much better.


But should we walk away from short-term, value-based trading opportunities as we work towards putting together our punch card? Maybe, but for some we may need our daily, weekly or monthly "fix" by attempting to exploit these short-term, high-expectations, value-based returns. Hey, you may even learn something or expand or deepen your circle of competence. But it's more than a fix; it can be a rational, thoughtful approach to reduce portfolio risk, increase returns and learn during the process.

The total short position as a percentage of the float is a useful indicator of just how unpopular a stock may be. But like all stocks they don't move in just one direction, and these stocks will not got away any time soon. Many of these short sellers will be forced to cover as they become impatient, fundamentals improve, market improves, hedge is no longer needed or optimistic news real or imagined is published. Countless reasons that buyers come in or short sellers cover creating a potential short-term, high-annualized return opportunity even for that universally hated stock.

Don't be surprised if some of these short-term ideas become long-term ideas if fundamentals change or your knowledge of the company improves. So tonight I decided to see if I could find a few ideas that may fit along the thesis of this post.

These are some of the metrics I looked at, but the combination was unique for each idea listed: short as a percentage of float, historical shorts position over the past 12 months, stock's price change over multiple periods, shares in float/shares outstanding, Z score, F Score, 2012 net insider activity, year over year revenue increase, enterprise value/market capitalization, book value in relationship to enterprise value, historical ratio valuation using EV to sales, gross profit, tangible book value, percentage held by insider and institutions, stocks return versus industry returns, change in shares outstanding, liabilities and cash over several years.

Okay, you get the idea: I am just looking for a margin of safety so I can increase my chances of monetizing in the short term without taking on excessive risk.

Now for a few quick ideas that fit with the thesis of this post:

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OSTK (Overstock.com) was simply selected based on only a few metrics. Short as a percentage of the float is 47%!Positive 2012 insider activity. Rated safe using the Z score at 5.2 and an F score of 4. Historically at its lowest valuation based on price to sales, book value. They have an reasonable financial position with 3.08 per share in cash versus the current price of 6.91 up 4.70% on Friday. Share count has remained stable and total liabilities have been reduced from a 2007 balance of 204,956,000 to the current 125,410,00. So even with the stock being off its 52 week low of 4.97 its still substantially off it 52 week high of 15.93.

On the negative... high litigation costs, no profitability, but for now the stock is owned by value investors Prem Watsa and Francis Cho. I still see this as a short term possible mean reversion idea and some investors see a far brighter future for the stock price.

At this time RSH is financially strong. But the 13% dividend yield could and should be at risk. Longer term shorts should consider the stock is trading at historical low valuations with EV/Sales = .25, EV/Book = 1.49 and EV/EBITDA = 6.87

ShadowStock Deep Value Investing

http://shadowstock.blogspot.com/


Rating: 3.3/5 (11 votes)

Comments

Patience Investing, Inc.
Patience Investing, Inc. - 2 years ago
interesting. but where i will find this info: short as a percentage of float or the screen that you have used in the article. thanks.
shadowstock
Shadowstock premium member - 2 years ago
Hi PI

I have and maintain this data warehouse containing hundreds of pieces of data on thousands of stocks. One of those data or metrics is short as a percentage of float. I create all my own screens of this data mart.

You can find short as a percentage of float from many sources. Yahoo Finance key statistics ,NASDAQ.COM, and others. for example OSTK: 46.40% Shorts as a percentage of float

http://finance.yahoo.com/q/ks?s=OSTK+Key+Statistics

Tomorrow I want to explain in more details on why these ideas were selected and how they fit into the thesis
Patience Investing, Inc.
Patience Investing, Inc. - 2 years ago
Thanks. Expect to read something more from you.

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